Be Careful of Oral Agreements!

Written by Evveline Loh.

 

 

The court had recently handed down their judgment in Coleman v Mundell [2020] EWHC 2852  in the Queen’s Bench Court around the end of last month. The case was a dispute about an oral agreement made between Mr Philip Coleman (the “Claimant”) and Mr Mundell (the “Defendant”). The Claimant issued a claim against the Defendant for specific performance of an oral agreement compelling the Defendant to perform and comply with their contractual obligation. However, specific performance is an equitable remedy which is only available at the court’s discretion.

 

So What Happened?

 

The Claimant owns Direct Entry Solutions Ltd (“DES”), which is a company that operated a courier business. The Claimant’s business was facing substantial financial difficulties in autumn 2016. The Claimant sought many ways to raise funding by executing second charge over his own property, overdrawing his own directors’ loan account and subsequently borrowed a loan from Pulse Cash Flow (“Pulse”). However, the Claimant felt there was a need for a further £250,000.00 cash injection for the company to trade its way out of the situation.

 

The Claimant had other businesses other than DES. He held 100% shares in Ninurta that owned 5 plots of valuable land (“the Ninurta Land”) in Marbella, Spain. The lands were valued around €2.55M and €3.1M. Having armed with evidence and knowledge of the value of the Ninurta Land, The Claimant first engaged Mr Hellier in discussions about raising funds. He needed the funds to invest in DES by using the Ninurta Land as collateral for the transaction. Mr Hellier and the Claimant could not come to an agreement on the first offer but agreed to meet in Spain for further discussion.

 

Whilst on the way to Gatwick airport, the Claimant received a call from the Defendant who was a long-time friend. The Claimant and the Defendant both had common interest in property development. They have both spent time together in London and Spain. The Claimant, whilst in discussion with Mr Hellier, also mentioned his current predicament and the potential of the Ninurta Land to the Defendant.

 

 

On 30 September 2016, the Defendant was interested as to what the Claimant could offer and both spoke over the phone. This was where the dispute arose as they both recalled the conversation differently.

 

The Claimant recalled that the Defendant agreed to offer the Claimant £250,000.00 interest-free loan subject to it being secured over the Claimant’s 50% share in Ninurta. However, the Defendant recalled that he was offered the option to purchase the Ninurta shares for £250,000.00, which the Claimant could then inject into DES. It was never meant to be a loan.

 

However, despite having different versions of the event, what was conclusive was that the parties did enter into a deed for transfer of share and the Defendant did transfer £250,000.00 to the Claimant.

 

Two years later, the Claimant sought to repay the Defendant £250,000.00. However, the Defendant refused and instead offered to sell his shares for £350,000.00. The Claimant argued that the transfer deed was only part of a wider contract in which the transfer of shares was only ever intended to be security for a loan. The Claimant argued that there was a collateral agreement, which he was entitled to enforce.

 

The Claimant’s Spanish lawyer, Ms Kaviani who had prepared the transfer testified that she recalled that the Claimant and the Defendant had told her that the Defendant was helping the Claimant as a friend and would take a security over the Claimant’s shares in Ninurta. It was further explained that parties could not fix a charge or a mortgage due to insufficient time to organise a valuation as this is required under Spanish law. Hence, the only way was to allocate the Defendant with 50% share capital of Ninurta then was by way of a security to the loan.

 

 

Judgment

 

The Court considered all the evidence and referred to Chitty on Contracts at 13-004 stating:

 

“It may be difficult to treat a statement made in the course of negotiations for a contract as a term of the contract itself, either because the statement was clearly prior to or outside the contract or because the existence of the parol evidence rule prevents its inclusion. Nevertheless, the courts are prepared in some circumstances to treat a statement intended to have contractual effect as a separate contract or warranty, collateral to the main transaction. In particular, they will do so where one party refuses to enter into the contract unless the other gives him an assurance on a certain point or unless the other promises not to enforce a term of the written agreement”.

 

The Court further adds that “It is undoubtedly true that the courts are nowadays much more willing to accept that a pre-contractual assurance gives rise to a collateral contract, so that such collateral contracts are no longer rare”. This was sited in the case Times Travel (UK) Limited, Nottingham Travel (UK) Limited v Pakistan International Airlines Corporation [2017] EWHC 1367 (Ch).

 

Therefore, if there is a genuine agreement for the transaction to be a loan whereby the share transferred acts as a security for the loan pending repayment, such oral agreement is enforceable albeit it not being in writing. As long as there is an ascertainable intention to contract, the court will seek to look at the substance and not the form of the agreement.

 

Hence, it was held that the Claimant has the right to repay the loan on an interest free basis and requires the shares to be transferred back to him.

 

Food for thought 

 

Oral agreements are as legally binding as written ones. The court has yet again proven that an agreement can be formed if the following four elements are present:

 

• i) an offer

 

• ii) acceptance of that offer

 

• iii) consideration

 

• iv) the intent to create legal relations

 

However, it is always better to have the terms of an agreement to be set out in writing at the outset to avoid such dispute from happening. The issue with oral agreement is that one will still need to prove it in court for it to hold up. You might need witnesses to support your claim, collect documentations or analysing the other party’s action to prove that there was indeed an oral agreement. Such task can be onerous, costly and time consuming. Sometimes you might even need a bit of luck to prove that it existed!

 

 

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